In this segment,

we'll look at how you will obtain the

financial ratios, as well as the liquidity

and activity ratios. We are getting our

ratios from Reuters.com. So, first go to www.reuters.com. From there, select markets

and then scroll down and select stocks. Now we enter the company

name or ticker symbol. For example, Apple is AAPL. And I hit search. Reuters wants to

show the exchange so AAPL.O is telling us that

it's on the NASDAQ exchange. So I will select that.

And we go to the

overview page for Apple. A few of the ratios are

contained on the overview page. We can see that Apple is at $490

today and the price changes. It is up $1.32. A little bit of

a roller coaster. A few of the ratios are

found on the overview page. We have the price earnings

ratio and earnings per share here, as

well as dividend, dollar amount, and

dividend yield. When you see a ratio

with TTM after it, that means it is calculated

using the trailing 12 months, or the last 12 months. Now back up to the menu bar. Select financials. Under the financials

tab, we get the ratios. We don't really get the balance

sheet or income statement. At the top of the page we

will see some historical data on revenue and

earnings, estimates of what analysts think future

sales and earnings will be, and finally we get

down to our ratios. Valuation ratios are what

we call market ratios. And you see the company

and the industry there. We'll be using both. Then we have dividend ratios,

growth rates, and finally what they call financial

strength ratios, we call the first

couple liquidity ratios and then the next several

are leverage ratios.

We're going to start

looking at individual ratios by looking at the current ratio. The current ratio is

calculated using MRQ. When you see MRQ that means

the most recent quarter. So it is not a

measure of 12 months, it's just the last quarter. These ratios are as up

to date as they can be. They're using the latest

financial information available. That's why we're

looking at them, too, not going all the way back

to the last annual report for everything.

Liquidity ratios

answer the question, can the company

meet its obligations over the short term? I.e., is there enough

cash to pay the bills? And it measures how many

dollars of short term assets are available for every

dollar of short term liabilities owned. And it's simply calculated

by taking current assets and dividing by

current liabilities. Generally, the higher the

ratio, the more the liquidity. Microsoft, for example, has

a current ratio of 2.71. This means that for every

dollar in current liabilities, Microsoft has $2.71 in current

assets to pay those bills. Apple, on the other hand,

has a ratio of 1.88. So we would say Microsoft

is more liquid than Apple. Here's a couple that

are little more extreme. Walmart has a liquidity

ratio of 0.83. This means that for every

dollar in current liabilities, Walmart only has $0.83

in current assets. Will Walmart be able

to pay its bills? Well, it is Walmart. Yes, it well. And this is because Walmart pays

its vendors slowly and is very, very efficient in cash

and asset management.

Fastenal, on the other hand,

has a liquidity ratio a 5.95, almost six. So that means for

every current liability that they have– every dollar

in current liabilities– they have $6, almost,

in current assets. Why? Well, Fastenal is a very

conservative company and always has a lot of cash. Is it better to have a very,

very high current ratio? Well, not necessarily. Cash does not

generate much income. You don't earn much

interest on cash these days, but it does provide safety. Who uses these ratios? A very important set

of users is vendors. Vendors will look at

the financial statements of a company to see if they

believe the company will be able to pay them on time if

they get the company credit. This is one of the most

commonly used ratios. Another liquidity ratio

is the quick ratio. Answers the same

question, but it looks at what they

call quick assets. In the quick ratio,

we subtract inventory, because it is not as quick to

turn inventory into cash as it is to turn accounts

receivable– typically 30 days– cash and investments into

cash to pay liabilities. So sometimes this shows

a different story.

Again, Microsoft,

more liquid according to this measure than Apple. Look at Walmart. For every dollar in

current liabilities, they only have $0.24

in quick assets. Very low. Fastenal, still,

for every dollar in current liabilities,

$2.88 in quick assets. Very strong in liquidity. Again, used by vendors

who want to know if they will be paid on time. Also used by management

to help them determine, do they have enough liquidity

or not enough liquidity. A second type of ratios is

what is called asset management or activity ratios. These are more what I think

of as a measure of speed. For example, the accounts

receivable turnover measures how quickly is the

company collecting or turning over its accounts receivable. The turnover is calculated

by dividing annual sales by the accounts receivable. And the number of days

sales in receivable is measured by taking

365 days in the year and dividing by the

receivables turnover that you just calculated. For example, Microsoft's

accounts receivable turnover is 4.68 times per year. This means that they have 78

days in accounts receivable. Is this good or bad? Well, this can depend

on the industry. But for example, if the terms

that they gave their customers were 30 days– in other

words, their customers are supposed to pay in 30 days–

78 days would be very bad.

What we can say is that

Apple, with a turnover of 20 and only 18 days in receivables,

has a faster– and therefore better– accounts receivable

turnover than Microsoft. Who uses this ratio? This ratio is very commonly

used by management. It can help determine

whether they're being paid on time according

to their credit terms, whether there is trouble–

they need to go out and really work on collecting

accounts– and it can be used to evaluate the

performance of the accounts receivable department or

accounts receivable management.

Another activity ratio is

the inventory turnover. How quickly is the

company selling, or turning, its inventory? I think of grocers. When you have fresh

produce you expect them to turn over that

inventory every few days. This ratio will vary

widely by industry. Calculated similar to the

accounts receivable turnover. Microsoft has a

turnover of 13 times. They have 28 days sales and

inventory, measured in days– and it's always whole days. We don't have, like, 28.2 days.

We round it up to

the nearest day. Apple, on the other

hand, has a turnover of 74 times per year,

which means they only have five days

sales and inventory. Now Microsoft, what do they

have in inventory, software and maybe tablets? Apple, you would think

would have more inventory, but they have been very

efficient in having the people that are

manufacturing products for them and their dealers

hold the inventory. So they have very little

invested in inventory at any time. The faster the better, so

the higher ratio, the better. And again, this is

used by management to manage performance and

monitor activity and trouble spots. One really key

ratio for a company that will impact the total

performance of the company is the total asset turnover.

It answers the question,

how efficiently is the company using its assets

to generate sales overall? So for the turnover,

we take the total sales divided by total assets. The higher the ratio,

the better or faster. The lower the ratio, the

slower the turn, or worse. For example, Microsoft

at September 30 had a total asset

turnover or TAT, of 0.59. Apple, on the other hand,

had a turnover of 0.93, so that is better. That's almost one. What this means is that for

every dollar in total assets, Apple generated $0.93 in sales. Again, this is a very key ratio. And it is use pretty

much by everyone who is evaluating the company. In the next segment we'll take

a look at profitability ratios..